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Income Strategies with Annuities

Income Strategies with Annuities. Agenda. The environment for annuities Systematic withdrawal Annuitization Income hybrids of the future. The Environment. The avoidance of taxes is the only intellectual pursuit that still carries any reward. – John Maynard Keynes (1883–1946). THE IRS.

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Income Strategies with Annuities

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  1. Income Strategies with Annuities

  2. Agenda • The environment for annuities • Systematic withdrawal • Annuitization • Income hybrids of the future

  3. The Environment

  4. The avoidance of taxes isthe only intellectual pursuitthat still carries any reward. – John Maynard Keynes (1883–1946)

  5. THE IRS

  6. THEIRS

  7. Current Environment • Annuity sales rising • Increased popularity of variableproducts • Exploitation of annuity “pitfalls” • Investor concerns

  8. A Dose of Reality • People are living longer • Doubts about Social Security • Pension plans are less common • Costs are rising • Markets don’t grow to the sky

  9. Invincible or Vulnerable? • Financial asset values have risenat rapid rates • Need for more efficient incomeand wealth transfer • Fund and stock assets seen as better wealth-transfer vehicles

  10. The focus has beenon accumulation

  11. The focus should beon income

  12. Income Concerns • Inflation • Health care issues • Unexpected expenses • Outliving the income stream

  13. Income Tools • Systematic withdrawals • Bonds • CDs • Money markets • Annuities

  14. Structuring Income Qualified Assets Annuities Capital Assets Intended for financial advisers only.

  15. Annuities are meantto be spent!

  16. Systematic withdrawals from annuities

  17. Systematic Withdrawal Advantages • Flexibility • Perceived liquidity • Remaining value appears each month on client statement • Assets stay on adviser’s book

  18. Systematic Withdrawal Limitations • No apparent tax benefits • No income guarantees • Over-aggressive increases in income could deplete principal • Potential of outliving your income

  19. Systematic Withdrawal The method of choicefor annuity income

  20. The “A” Word

  21. Annuitization

  22. Perception or Reality? • Income never changes • You cannot stop or adjust it • Insurance company keeps the money at death • “Dead” money on adviser’s books

  23. Annuitization Advantages • Tax-advantaged withdrawals • Income a client cannot outlive • Client “customization” of their income stream • Fixed or variable payments

  24. Annuitization Limitations • Difficult to understand • Loss of control • Loss of liquidity • Statements are replaced by checks • Adviser discomfort

  25. Guarantees Income Insurance Company

  26. Annuitization • Single-life options • Joint-life options • Non-life options

  27. Annuitization Single-Life Options • Single life only • Single life with period certain • Single life with refund feature

  28. Annuitization Joint-Life Options • Joint life only • Joint life with period certain • Joint life with reduced payment to survivor • Joint life with “pop-up” provision

  29. Annuitization Non-Life Options • Designated period certain • Designated amount • Fixed payout only • 3 to 30 years

  30. Annuitization Flexibility • Fixed, variable or combination • Monthly, quarterly, semi-annual or annual payments • Made by check or electronic funds transfer (EFT)

  31. Case Study #1 • Male, age 70 • Single-life only option and 10 years period certain • American Legacy Growth-Income Fund • $200,000 account value andcost basis

  32. American Legacy III Growth-Income Fund Historical Variable Payout $200,000 cost basis with variable annuitization payments beginning 03/84 $7,000 $6,000 $5,000 $5,578 $4,000 Monthly Benefit $3,000 $2,000 $1,292 $1,000 $0 03/84 03/85 03/86 03/87 03/88 03/89 03/90 03/91 03/92 03/93 03/94 03/95 03/96 03/97 03/98 03/99 03/00 03/01 03/02 Date Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

  33. Tax Efficiency Monthly Income Tax Excludable Cumulative Income Cumulative Tax Excludable Date Mar ’84 $1,292 $927 $1,292 $927 Mar ’89 $2,153 $927 $112,870 $56,551 Mar ’94 $2,903 $927 $268,367 $112,176 Mar ‘02 $5,578 $0 $713,890 $200,000 Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

  34. Case Study #2 • Female, age 65 • Concerns: • Spending assets efficiently • Not outliving income • Leaving something to heirs

  35. A Story of Growing Income $200,000 invested in 1987in American Legacy Growth-Income Fund. Systematic withdrawals begin 1992. Account value is $430,038 inJanuary 1997 when annuitization life with refund option payments begin. Date Monthly Income Cumulative Income Value of Unit Refund Jan ’97 $2,129 $2,129 $427,909 Jan ’99 $2,846 $62,690 $503,723 Jan ’00 $3,005 $98,327 $495,883 Jan ’02 $3,000 $170,721 $423,009 Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

  36. Case Study #3 • Husband and wife, age 60 • Newly retired, no pension plan, rollover assets • $200,000 joint with pop-up,American Legacy Growth-Income Fund • Concerns: • Outliving income

  37. Joint and survivor with pop-up provision $200,000 American Legacy Growth-Income Fund. Annuitization begins in 3/84. Annual Incomewith Pop-up Year Annual Income Mar ‘84 $9,908 $9,908 Mar ‘89 $16,439 $16,439 Mar ‘94 $22,121 $26,926 Mar ‘95 $22,497 $27,384 Mar ‘02 $41,375 $50,361 Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

  38. Income Hybrids

  39. Income Hybrids • New enhancements and product innovations in development • Geared for annuity owners needing more income flexibility • Combines the best features of annuity-income alternatives

  40. The Benefits • Tax-advantaged withdrawals • Payments guaranteed for life • Increased liquidity and flexibility • Access to additional cash • Monthly statement reporting and daily account values

  41. The Benefits • Automatic portfolio re-balancing • Ongoing re-allocation of assets • Dollar cost averaging* • Performance reporting • Assets under management *This investment method involves continuous investment in securities and does not guarantee a profit. Investors should consider their financial ability to continue purchasing through all price levels.

  42. Case Study #4 • Male, age 60 • Concerns: • Wants to spend assets efficiently • Access to additional income • Keeping pace with inflation and participating in market performance

  43. Customized Income Solution $200,000 American Legacy Growth-Income Fund. Annuitization begins 4/84. Avg. Annual Income Year Withdrawal 1984 $0 $10,303 1987 $0 $18,176 1988 $50,000 $15,838 1989 $0 $14,058 1991 $0 $15,891 2001 $0 $34,052 Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.

  44. 480

  45. Summary Annuities are meantto be spent!

  46. What should you do? • Talk to your clients • Explore their income needs and wealth-transfer concerns • Consider the many ways annuities can help them meet those needs

  47. American Legacy III Growth-Income Fund Average annual compound returns through March 31, 2002, with all distributions reinvested 10 years 5 years 12 months +12.11% +11.38% +5.82% Results reflect payment of the appropriate contingent deferred sales charge (CDSC), which starts at 6% for the first two years and declines to 0% after the seventh year.The CDSC is waived for certain withdrawals as described in the prospectus. Results also reflect deduction of all fund and contract expenses, including a 0.25% distribution fee, a 0.10% administrative fee and a 1.30% mortality and expense risk charge, which includes the 0.15% charge for the optional enhanced guarantee minimum death benefit (EGMDB), If the EGMDB was not in effect, the results would be higher. Figures shown are past results and are not predictive of future results. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. Unit price and return will vary, so investors may lose money.

  48. This presentation is intended for financial advisers. Investors seeking more information about any of the American Legacy variable annuities or American Funds Insurance Series, including risks, charges and expenses, should obtain the applicable prospectuses from their financial adviser and read them carefully before investing or sending money. If income results are presented, this presentation is authorized for use with prospective investors only when preceded or accompanied by the current prospectus for the fund(s) being offered. If investment results are presented, this presentation must be accompanied by the most recent American Funds Group and American Legacy Variable Annuities Quarterly Statistical Update. All results reflect appropriate charges and expenses for American Legacy III. Securities offered through and annuities issued by The Lincoln National Life Insurance Company, Fort Wayne, IN.

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